Renewables are getting cheaper, but it may take the global fossil fuel industry a while to accept the inevitable decline in its markets. Putin’s war in Ukraine may accelerate that, but it may be too early to say whether the overall energy outcome will be positive. Certainly change will be resisted. As a (pre-war) report from Mckinsey noted, although under pressure, the fossil energy sector has mostly been looking for ‘high-grade portfolios toward advantaged hydrocarbon growth opportunities,’ in the belief that, although it is declining overall, ‘the mature phase of any industry’s development is often its most profitable’.
However, McKinsey did note that companies like BP were hedging their bets, by looking ‘to retain their profitable core while also capturing some of the large global opportunities now emerging in low-carbon markets’, with some of that presumably involving Carbon Capture and Storage to keep fossil fuel markets going. But the shift to clean technology has arguably been quite marginal. For example, it has been reported that BP has spent about $3.2bn on clean energy since 2016, as against $84bn on oil and gas exploration and development.
Nevertheless, McKinsey notes that there are also some fully green, renewables-orientated breakout groups like Orsted, adding that ‘the best-performing low-carbon companies are now achieving comparable returns over their (lower) cost of capital versus their oil and gas peers’. So things may change, although Mckinsey warns that the net zero energy transition could be disorderly- until the costs of the new systems stabilised. And so, even if well planned, ‘consumers would face up-front capital costs and may need to spend more in the near term on electricity if cost increases are passed through’.
Well that already seems to be underway...and of course, Putin’s war in Ukraine looks like making it worse -pushing up prices even more. But there is also a more optimistic view. Amory Lovins and colleagues from the Rocky Mountain Institute in Colorado recently argued that it might all turn out be good news for renewables and energy saving.
The RMI team says that Putin’s war changes everything, as ‘the world’s biggest fuel exporter is suddenly unlinked from major markets’. It is hard to disagree with that in general terms. But more specifically they argue that ‘rather than coasting gently into a slow decline, fossil fuel demand now faces the prospect of prompt, rapid, and sustained decline, driven by three imperatives no longer at odds but now fully aligned: security, climate (and health), and economics. The energy trilemma has been solved by the synergistic pairing of efficiency with renewables’.
Well maybe. Certainly the huge shock administered to the global system, had led to major changes. They say ‘German policy shifted more in ten days than in the previous ten years’ and ‘the European Commission plan ramps up the key tools of greater efficiency, additional renewables, more electrification, and better policy’, so that a new future may be possible.
The paper says that the EU plan ‘implies the installation of 900 gigawatts of solar and wind as well as 30 million heat pumps and quadrupled green hydrogen,’ by 2030. And RMI claims that ‘it is completely feasible to cut Russian fossil fuels out of European supply long before 2030 simply by growing solar and wind and increasing efficiency’ That may seem optimistic, but RMI notes that ‘in 2020, solar and wind provided 541 TWh of electricity to Europe, enough to displace 5 EJ of fossil fuels. At 15 percent annual growth rates (a little higher than the 2010–2020 13 percent European average), solar and wind would be able to displace an additional 12 EJ/year of fossil fuels. Meanwhile, European energy demand has been falling at 1 percent per year for a decade. Another decade of decline would cut demand by 5 EJ/year’.
It also looks to enhanced ‘leap frogging’ by developing countries: ‘Rather than going through an intermediate fossil-fuelled stage of development, far-sighted leaders in the Global South are already leapfrogging directly to renewables. Those are cheaper, cleaner, secure, constant-price, and rich in local jobs and multipliers’. Putin’s war may speed that up too. Well maybe. It’s optimistic stuff….but sadly it is not backed by recent analysis of the situation in oil/gas rich Nigeria. Indeed it, and other countries heavily reliant on fossil fuel, may look to increased gas exports to the EU.
However in some locations things may change. That may hinge on whether demand for fossil fuel can be reduced. That did happen during the Covid shut downs, but demand mostly sprung back afterwards. What RMI seems to be hoping is that, in Europe at least, the extra cost of oil and gas, due to the war in Ukraine and the responses to it, will stimulate renewables and energy saving. Well, it has in some countries, notably Germany. But some others have gone for nuclear. For example, Belgium extended the operating life of its last two nuclear reactors until 2035, delaying its nuclear phaseout by 10 years. However, it also plans to accelerate renewables with an investment of €1.1 bn. The UK’s response was also similarly two ways facing. We will have to wait to see what the final outcome will be.
The alternative is to cut demand and accelerated renewables really fast. Can that be done by leaving it up to the competitive market system? One problem on the supply side is that, if markets work, and prices fall, profit margins also fall. It’s called ‘market cannibalism’. It is bad news for producers, a race to the bottom, leaving no one standing. But if sales volume increases, then destructive competition can be avoided – and expansion of renewables is what we needed, at least at this stage. However, the market approach may be too slow- extra state stimulus may also be required to speed things up. Past attempts to do that via market enablement mechanisms, Feed In Tariffs, CfDs and so on, have been reasonably effective, getting the market the support chosen options, but we may also need more direct state support and what use to be called public enterprise to accelerate the development of some options – like tidal and wave power. And on the demand side, a lot can be done via regulation, forcing changes in energy use and technology.
There is clearly a need for change. Will we rise to the occasion? Will Putin have helped? There is certainly a risk that we will just backtrack, and that the crisis will get even worse, but it is also possible that the new fossil fuel shock will have a positive impact.
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